Small-caps are also more thinly-traded than bigger companies. Investors who get in early on a small-cap that becomes a large company may benefit as investors get wind of the stock and buy it – pushing the price higher.
One risk in small-cap investing is that small companies often operate within a specialized or target business area. Because of their less diverse nature, these small companies would be more sensitive to economic uncertainty, which investors would see in their higher volatility. As with most volatile investments, the possibility of higher returns is also evident.
Why Small-Cap ETFs?
Given the small size of small-caps, doing research can be a time-consuming challenge. That’s why many prefer to leave the legwork to ETF providers, who have carefully built indexes of high-quality corporations. You, in turn, can own a universe of small-caps in one easy trade for your clients.
Small-cap ETFs offer different strategies in the makeup of their funds, including traditional market-cap weighted indexing, fundamental weighting based on earnings or dividends and rules-based investing that would select stocks based on quantitative measures.
This is true of all ETFs, but when it comes to small-cap ETFs in particular, watch the expense ratios. The need to buy smaller stocks can sometimes translate into higher costs for the fund.
By understanding the environments in which small-cap companies tend to perform at their peak, you can effectively invest in small-cap ETFs for your clients. You can find all of the small-cap ETFs by visiting the ETF Analyzer. Once there, you can sort them by performance, yield, expense ratio and more.